Just when you thought it was safe to go outside again, the subprime litigation wave has struck once more. On August 7, 2008, plaintiffs’ lawyers filed a securities class action lawsuit in the Southern District of New York against KKR Financial Holdings LLC and certain of its directors and officers. A copy of the plaintiffs’ lawyers’ August 7 press release can be found here, and the complaint can be found here.
According to the complaint, KKR Financial Holdings LLC (KFN) is an affiliate of the private equity firm Kohlberg, Kravis, Roberts & Co. KFN is a specialty finance company that invests in multiple asset classes. The complaint relates to representations allegedly made in connection with May 4, 2007 merger and share issuance transaction associated with the affiliate’s conversion from a REIT to a limited liability company. In this transaction, investors holding shares in the predecessor company received an equal number of shares in the successor company.
The complaint asserts claims based on the Securities Act of 1933. According to the press release,
the Registration Statement was false and misleading in that it misrepresented and/or omitted material facts, including: (a) the problematic real-estate-related assets held by the Company were a much bigger risk to the Company than the Registration Statement had represented; (b) the Company’s capital would be insufficient given the deterioration in its portfolio which would necessitate capital preservation and the need to raise capital to the detriment of common stockholders; and (c) the Company was failing to adequately record loss reserves for its mortgage-related exposure, causing its balance sheet and financial results to be artificially inflated.
During May, June and most of July 2007, KFN’s stock traded above $25 per share. In late July, many mortgage-related companies’ stock prices declined, including KFN’s. Nevertheless, KFN’s stock closed at $18.02 per share on August 13, 2007. Then, on August 15, 2007, KFN issued a release which revealed that KFN would be selling $5.1 billion in mortgage backed securities at a loss. When this news was revealed, KFN’s stock price collapsed to as low as $9.39 per share, eventually closing at $10.52 per share, a decline from the prior day of 31%. KFN shares currently trade for approximately $10 per share, a 63% decline from the $26.90 per share at which they were sold to plaintiff and the Class.
After the last year and a half, when there has been a flood of new subprime-related lawsuits, there is perhaps nothing too surprising about the kinds of allegations in the KFN complaint. What may be a little bit surprising is that the disclosures on which the complaint is based, and the ensuing stock price drop, took place nearly a year ago.
While the subprime litigation wave has been unfolding, there have been occasional periods where it has seemed as if the plaintiffs’ lawyers are engaging in a little backing and filling, as if catching up with unfinished business that went unattended due to occasional logjams. Given the magnitude of the stock price drop associated with the disclosure (more than $1 billion), as well as the prominence of the company’s affiliated relations, this case seems like it might not have been overlooked.
But in any event, I have added this case to my running tally of subprime and credit crisis-related securities lawsuits, which can be accessed here. With the addition of the KFN lawsuit, the current tally of subprime and credit crisis-related securities lawsuits now stands as 103, of which 63 were filed in 2008.